Even though India’s economy is expanding at an annual pace exceeding 7%, the country’s stock markets are mired in an extended downturn, prompting concerns about why robust GDP growth isn’t translating into equity market gains.
India holds its place as the fastest-growing major economy worldwide, yet the leading indices have sharply pulled back. This unexpected split between strong economic indicators and weak stock market results stands out, particularly as most other global markets have either bounced back or held steady.
Domestic investment offsets foreign capital flight
The Sensex and Nifty have undergone a record decline, falling for eight straight weeks—a negative streak not matched in 25 years, according to Reuters. Although markets have staged a modest rebound since Monday, investors saw a 15% reduction in their portfolio values during 2026 alone.
By comparison, an investment in Korea’s Kospi index from January would have grown by 62%, and holding that position for two years would yield 170% returns. In contrast, Indian stocks have seen foreign institutional investors remove $40 billion over the last two years, as revealed by Bernstein Research. When taking into account all inflows and outflows over the past ten years, foreign investment is effectively flat.
What has prevented an even sharper collapse in stock prices is the surge in investments from within the country. Indian mutual funds now manage approximately $900 billion, a dramatic increase from $125 billion in 2016. The base of retail investors in both equities and mutual funds has grown more than threefold to 150 million, providing essential support amid challenging conditions such as persistent inflation, tepid job growth, and weaker consumer spending.
Top five reasons behind market underperformance
Analysts list several factors for the recent struggles of Indian equities:
- Long-running energy shocks: For eight months, maritime traffic through the Strait of Hormuz has been impacted by Middle East unrest, driving crude oil prices into the $90–$100 per barrel range. India, which relies on imports for over 90% of its crude oil—much of it shipped through this strait—faces rising corporate costs and tightening margins due to expensive energy. Furthermore, U.S. threats to impose 100% tariffs on those dealing with Russia, a key source as India diversifies, add further complications.
- Higher global interest rates: Central banks globally have lifted interest rates in response to inflation, pushing U.S. Treasury yields above 5%—the highest in nearly 25 years. This lures capital away from emerging markets like India toward perceived “risk-free” assets, accelerating foreign outflows.
- Rupee depreciation: The Indian rupee’s decline has translated into muted returns for foreign investors—just 6% annualized over ten years on the Nifty when measured in dollars—making Indian markets less attractive compared to other international options.
- Valuations remain high: Despite recent selloffs, Indian stocks’ price-to-earnings ratios are still above historical averages and outpace those in emerging markets that have benefited from the growth of new technology-driven sectors.
- Missing out on the global AI rally: Indian firms have largely been left out of the AI-powered profit surge that’s benefited peers in South Korea, Taiwan, and elsewhere. Bernstein Research highlights that India’s major listed companies still focus on traditional sectors, with limited inroads into advanced tech such as AI or deep technology, dampening foreign investor appetite. For further details, see India seeks AI breakthrough – but is it falling behind?
What’s next for India’s stock market?
How Indian equities perform going forward will depend on changes in both international and domestic factors. Brokerage CareEdge notes that easing geopolitical concerns and more attractive valuations might lure back foreign portfolio investment (FPI) at some stage. However, persistent trade issues and the prospect of high energy costs continue to cast a shadow, putting pressure on corporate earnings in the near term.
Despite the volatile climate, Indian mutual fund participants have steadily maintained their monthly investment flows , external, even as markets fluctuated. Yet, it’s uncertain whether this domestic resilience will hold if there’s a more severe downturn ahead.
With India’s macroeconomic performance continuing to impress, the future recovery of local stock markets depends on whether both internal and external elements can finally converge in support.